Governance is generally thought of as being provided by a board and perhaps a few other structures such as the ownership structure – and, in the case of family business, the family council. But governance is much more than a structure: it is a system; a holistic approach. This governance formula states that, for governance to be effective and contribute to business continuity over time, three fundamental and interrelated elements are necessary:
“Effective Governance” = “Transparency” x “Governance Structures” x “Principles and Policies”
The governance formula is a multiplication function – that is to say, if any of the individual building blocks or independent variables is absent, or largely absent, effective governance will tend towards zero. At zero, or a similarly low value, effective governance will make no meaningful contribution to the sustainability and continuity of the family firm over generations. It is therefore imperative that leadership initiatives by the CEO/chairman and others ensure that all three building blocks are in place.
Transparency requires clearly communicating strategic plans, financial statements, financial analysis, and overall wealth/estate information to shareholders in a timely, clear, and actionable way. This is especially important the older the company and the greater the number of owners. This transparency is created via communication and education of shareholders in ownership forums.
Governance structures are the institutions and governance bodies that serve leading families globally in their efforts to build resilience to the challenges of wealth. They include: family councils, shareholder meetings, board of directors (at the business unit and the holding company), and, in later generations, family offices.
Principles and policies that are often contained in family constitutions and shareholder agreements developed by leading enterprising families in later generations include: employment and participation policies; dividend, distribution, and reinvestment policies; mission, duties and coordination of each of the various governing bodies, shareholder and trust agreements that address buy-sell, rights of first refusal, voting rights, and control structures.
All these practical vehicles to create architecture for effective governance are addressed in the book “Governance in Family Enterprises.” But, to re-state, finding solutions to the fundamental challenges in the evolution of the family enterprise requires a systematic approach. It needs to include initiatives in all three areas: transparency, governance structures, and principle and policies.